You just purchase $85000 in goods from your supplier credit terms of 3/10 net 30. on which day should you pay. both the discount rate and the borrowing rate is 5%.
Anyone please??
Pay $82,450 on day 10. You have effectively earned 74.35% (annual) on your money for 20 days.
what is the use of given discount rate and borrowing rate of 5% in the question?
It’s there to mislead you.
If you say to yourself that 5% is greater than 3%, then you’ll mistakenly conclude that you should wait and pay after 30 days, thinking that if you paid earlier you would have to borrow at a higher rate to finance it.
In fact, you should compare 5% to 74.35%, as both are annual rates.
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